FOREX-Euro slips against dollar as Draghi assures loose policy

Reuters Staff

3 Min Read

* Dovish comments from ECB’s Draghi weighs on euro

* U.S. Treasury-German bund spreads point to further dollar gains

* Strong U.S. economic data also lifts dollar

By Anooja Debnath

LONDON, June 26 (Reuters) - The euro fell to a three-week low against the dollar on Wednesday after the European Central Bank chief flagged downside risks to euro zone growth and said monetary policy will stay accommodative.

The single currency was down 0.5 percent at $1.3023, not far from the $1.3014 hit earlier which was its lowest since June 3. An options barrier was reported at $1.30. Technical analysts said a daily close below its 200-day moving average at $1.3073 could trigger more falls towards and below $1.30.

ECB President Mario Draghi said on Wednesday that the economic recovery in the euro zone would be gradual but fragile, which was in line with his previous day’s comments that the ECB was nowhere near exiting its accommodative monetary policy.

Analysts pointed to the recent sharp rise in short-term euro inter-bank lending rates, which could drive the ECB to respond by easing monetary conditions and in turn weigh on the euro.

The three-month Euribor rate, traditionally the main gauge of unsecured bank-to-bank lending, had spiked from 0.198 percent on May 21 to 0.225 percent on June 25.

“The U.S. economy is still in better shape than Europe, which is still very weak and can’t withstand higher (short-term) rates at this time and rate spreads will continue to pressure euro/dollar lower,” said Paul Robson, FX strategist at RBS.

“Draghi on balance will have to sound a bit more dovish to make sure that markets don’t start pricing in (an interest) rate hike too early.”

Spreads between 10-year U.S. Treasuries and German bund yields have widened to their highest since April 2010 in favour of the dollar assets.

The single currency also lost ground on Tuesday to the dollar which was lifted by encouraging U.S. business spending and housing data, lending impetus to expectations that the Federal Reserve will before long begin to scale back monetary stimulus.

Niels Christensen, currency strategist at Nordea said investors would “need more confirmation of the growth momentum in the U.S.” for the euro to start falling towards the early May and early April lows just below $1.28.

The dollar rose to a three-week high of 82.878 against a basket of currencies, buoyed mainly by solid gains against the euro.

But it stayed weak against the yen and was down 0.25 percent at 97.55 yen as worries about a cash crunch in China supported safe-haven flows into the Japanese currency.

Traders will watch a string of Fed speakers later in the day to gauge their stance on how quickly monetary easing will be scaled back.